January 2019 Review
January saw a nice rebound after the fourth quarter (Q4) drop. In looking back at Q4, there was an oddity. Equity moved before debt. Typically debt holders get uncomfortable with companies and reduce prices before equity holders. Debt holders are looking at a companies ability to generate enough cash to pay the coupon for the next few years. This longer term focus (relative to equities which tend to focus on the next quarter's earnings) means they usually spot trouble first.
Traders are blaming systematic trading (computer generated) as the cause of the Q4 downturn. The culprit is that most computer trading algorithms include a momentum factor as part of their decision making process. This means that the more stocks go up, the more they buy and the more stocks go down, the more they sell. This can create self sustaining moves both to the up and down side. These moves can also get started without any fundamental catalyst, like an economic downturn.
This is important to be aware of because moves driven by "technical" factors (meaning they are driven solely by trading patterns and not by economic fundamentals) tend to reverse quickly. When there is an economic downturn markets fall for about 18 months on average.
Performance as of January 31st was:
Traders are blaming systematic trading (computer generated) as the cause of the Q4 downturn. The culprit is that most computer trading algorithms include a momentum factor as part of their decision making process. This means that the more stocks go up, the more they buy and the more stocks go down, the more they sell. This can create self sustaining moves both to the up and down side. These moves can also get started without any fundamental catalyst, like an economic downturn.
This is important to be aware of because moves driven by "technical" factors (meaning they are driven solely by trading patterns and not by economic fundamentals) tend to reverse quickly. When there is an economic downturn markets fall for about 18 months on average.
Performance as of January 31st was:
| 1 Mo | 3 Mo | 1 Yr | 3 Yrs | ITD | |
| Equal | 6.42% | 1.19% | -0.53% | -na- | 8.22% |
| TA | 7.69% | -0.36% | -2.81% | -na- | 15.45% |
| Enhanced | 6.55% | 0.22% | -4.55% | -na- | 6.28% |
Small Cap equity (VTWO, 11.5%) was the strongest performer in January. This is expected in a strong rebound month (it also dropped the most during Q4). High Yield debt (JNK, 5.2%) also had a strong month, although not quite as good as Large Cap Equity (VONE, 8.4%).
For the Enhanced portfolio, Emerging Markets (IEMG, 9.6%), performed very well while international equities (JXI, KXI, 5.1%, 5.6%) and Commodities (DBCMX, 5.3%) were up similar to High Yield debt. On the debt side GOVT, 1.0% outperformed AGG, 0.9% by a small amount.
Blog Basics:
In this blog I share and discuss three portfolios.
The first is a "buy and hold" strategy that does not ever change. I call this the Equal portfolio because it is made up of four equal parts allocated to different asset classes. It is 1/4 in Large Cap Equity (Ticker VONE), 1/4 in Small Cap Equity (Ticker VTWO), 1/4 in Investment Grade Bonds (Ticker AGG), and 1/4 in Junk Bonds (Ticker JNK). The allocations never change. The only thing needed is to rebalance every so often as performance differences will cause the weights to get out of whack.
The second portfolio is a "tactical" portfolio. It is tactical because it adjusts the weights to the four asset classes above based on market conditions. I call this the TA portfolio. It can go 100% into any one asset class or be a mixture of them. 1/12th of this portfolio can change each month as I make a monthly call on what i expect will do best over the next year based on current market conditions. Historically I have picked the best asset class about 50% of the time, the second best about 25% of the time, the third best 18% of the time and the worst 7% of the time.
The third portfolio is also a "tactical" portfolio. I call it the Enhanced portfolio because I follow the same allocation as the TA portfolio but I try to pick other vehicles that will give a better return than the four basic ones used in the Equal portfolio. This allows for exposure to International Equities, Emerging Markets, and Commodities among others.
DISCLAIMER:
For the Enhanced portfolio, Emerging Markets (IEMG, 9.6%), performed very well while international equities (JXI, KXI, 5.1%, 5.6%) and Commodities (DBCMX, 5.3%) were up similar to High Yield debt. On the debt side GOVT, 1.0% outperformed AGG, 0.9% by a small amount.
Blog Basics:
In this blog I share and discuss three portfolios.
The first is a "buy and hold" strategy that does not ever change. I call this the Equal portfolio because it is made up of four equal parts allocated to different asset classes. It is 1/4 in Large Cap Equity (Ticker VONE), 1/4 in Small Cap Equity (Ticker VTWO), 1/4 in Investment Grade Bonds (Ticker AGG), and 1/4 in Junk Bonds (Ticker JNK). The allocations never change. The only thing needed is to rebalance every so often as performance differences will cause the weights to get out of whack.
The second portfolio is a "tactical" portfolio. It is tactical because it adjusts the weights to the four asset classes above based on market conditions. I call this the TA portfolio. It can go 100% into any one asset class or be a mixture of them. 1/12th of this portfolio can change each month as I make a monthly call on what i expect will do best over the next year based on current market conditions. Historically I have picked the best asset class about 50% of the time, the second best about 25% of the time, the third best 18% of the time and the worst 7% of the time.
The third portfolio is also a "tactical" portfolio. I call it the Enhanced portfolio because I follow the same allocation as the TA portfolio but I try to pick other vehicles that will give a better return than the four basic ones used in the Equal portfolio. This allows for exposure to International Equities, Emerging Markets, and Commodities among others.
DISCLAIMER:
Past performance is not a guarantee of future performance. This strategy is presented for informational purposes only and is not a solicitation to buy or sell any securities. The writer of this blog owns many (long positions only), if not all, of the securities discussed in this blog. October is one of the peculiarly dangerous months to speculate in stocks in. The others are July, January, September, April, November, May , March, June, December, August and February. ~ Mark Twain
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